Douglas Albo's  Instablog

Douglas Albo
  • on Closed-End Funds
Send Message
Registered Investment Advisor. Prior experience includes 12-years as a Vice-President, Financial Advisor at Smith Barney and Morgan Stanley.
My company:
Capital Income Management, LLC
My blog:
  • Buy GRX, Short XLV As A Hedge 8 comments
    Jul 19, 2013 2:14 PM | about stocks: GRX

    Some of the most unbelievable investing opportunities are in CEFs and this one's a doozy. On a day when the SPDR Healthcare ETF (NYSEARCA:XLV) is hitting an ALL-TIME high at $50.50, up over 1.2% on an overall negative day in the markets, the Gabelli Healthcare & WellnessRX fund (NYSE:GRX) is DOWN 2.35%, below $10 here at $9.99.

    GRX's NAV will probably be close to $12 after today, which means you can pick up a leveraged, healthcare stock only fund, at around a -16% discount, unheard of for a fund that has the best NAV performance not just YTD at up 26.5%, but also over the last couple years as well.

    So why is GRX trading down? Because a rights offering was just completed which gave existing shareholders the right to buy 1/3 of their existing share position at $9. So for investors who don't want an additional 1/3 increase in their position, assuming they put in for the rights, they can sell at close to $10 for their additional shares at a $9 cost basis.

    But this is incredibly short-sighted since an investor would be a lot smarter to hold onto their GRX shares, which would maintain their proportional share of the fund, and instead hedge their added exposure by shorting the XLV or another healthcare focused ETF. If an investor doesn't currently own GRX, then you may not want to hedge at all. Nonetheless, I believe this is an incredible opportunity to own one of the best performing CEFs at a steep discount that is firing on all cylinders along with the healthcare, wellness and consumer discretionary sectors. GRX also offers about a 4% yield but this is a fund you buy for appreciation first, yield second.

    This, of course, is just my opinion and it assumes that GRX will reduce its discount back to a more normalized level once investors shed their additional shares.

    Disclosure: I am long GRX.

    Stocks: GRX
Back To Douglas Albo's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (8)
Track new comments
  • Robin Heiderscheit
    , contributor
    Comments (3297) | Send Message
    Thanks for point this out, DA. I chased it to $10.04 but put the hedge on at 50.55. I think the market retests the June low so I am not looking to add beta but I agree with you that the discount should close to a more typical 4-10% over the next few weeks. I would caution that until the last year or so this usually traded at 12-16% discount.
    19 Jul 2013, 03:23 PM Reply Like
  • Douglas Albo
    , contributor
    Comments (917) | Send Message
    Author’s reply » Prior to last year, GRX had no regular distribution which contributed to its wide discount historically. And even though GRX's yield is "only" 4% now, unlike a lot of other CEFs that trade at wide discounts because of low to no yield, GRX compensates for that with its enhanced appreciation potential.
    19 Jul 2013, 06:02 PM Reply Like
  • metal27
    , contributor
    Comments (702) | Send Message
    A belated thank you for the intro to CEf's. I now own several, including GRX, all based on your analyses and articles. I saw GRX's drop today, did not understand it until now. I'll buy more on Monday.
    20 Jul 2013, 01:12 AM Reply Like
  • Wnf0810
    , contributor
    Comments (4) | Send Message
    Doug, I like the play but I have been long XLV for 10+ years and finally have a decent 60% capital gain in the position. I am adding to GRX via the rights offering. Im also long HQH and HQL to round out my healthcare exposure. Any recommendations? Its all in my IRA so I have more of a buy and hold philosophy on these investments.
    22 Jul 2013, 08:57 PM Reply Like
  • Douglas Albo
    , contributor
    Comments (917) | Send Message
    Author’s reply » A hedge is only suggested if you feel you might be too heavily weighted in GRX with the added 1/3 shares and want to hedge your downside.
    22 Jul 2013, 10:15 PM Reply Like
  • Robin Heiderscheit
    , contributor
    Comments (3297) | Send Message
    Turns out we had the NAV of GRX wrong . . . just goes to show you always need to do your homework first, discount is only 10% as of close of rights offer
    26 Jul 2013, 10:21 AM Reply Like
  • Douglas Albo
    , contributor
    Comments (917) | Send Message
    Author’s reply » Yes, I should have reiterated that the NAV would be reduced with the added shares and cash infusion. I thought it would only be reduced a few % like I said in this instablog on June 13th...


    "At a $9.80 market price currently, trading without the rights, I believe this drop is overdone. Considering GRX has an NAV of $11.28 and this rights offering will bring down the NAV only a few percent according to my calculations, that is still an extremely wide market price discount."


    Turned out to be more based on the drop but in the long run, it should really only be a temporary blip.
    27 Jul 2013, 07:12 PM Reply Like
  • tennvol_30736
    , contributor
    Comments (1874) | Send Message
    I apologize for being a bit off subject but I'm mystified at some of the option income CEF discounts. In reviewing some of the Blackrock option income cef's, the option premiums received for 6 mos ended 4-30-13 sometimes cover or almost cover the distribution in and of itself. This suggests with any effort at all, cash flow from these funds should easily pay the distribution yet, Blackrock has a recent history of distribution cuts. Can you reconcile this in my mind?
    26 Nov 2013, 10:56 AM Reply Like
Full index of posts »
Latest Followers


More »

Latest Comments

Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.